1. A(n) ____ in interest rates could reduce a commercial bank’s expected cash flows because the interest paid on deposits may ____ than the interest earned on loans and investments.
a. increase; increase to a greater degree
b. increase; increase to a lesser degree
c. decrease; increase to a greater degree
d. decrease; increase to a lesser degree

2. Even if other external forces (such as interest rates) are unchanged, a commercial bank’s expected cash flows can change in response to a change in its management skills.
a. True
b. False

6. Net interest income is the difference between gross interest income and interest expenses and is measured as a percentage of
a. liabilities.
b. shareholder’s equity.
c. assets.
d. revenues.

7. Fees charged by a bank on various services allow the bank to generate:
a. noninterest income
b. components of net interest margin
c. components of net interest income
d. components of gross interest income

8. The loan loss provision as a percentage of assets should increase during periods of high economic growth.
a. True
b. False

9. A bank’s net interest margin represents the proportion of its investments that are financed with borrowed funds.
a. True
b. False

10. If a bank has short-term deposits and provides long-term fixed rate loans, and interest rates decline over time, its net interest margin should be:
a. declining over time.
b. rising over time.
c. constant over time.
d. consistently negative.

11. For a given level of return on assets, a bank with a higher level of capital will have a lower
a. return on equity.
b. leverage measure.
c. noninterest income.
d. liquidity.

12. Net income measured as a percentage of assets is
a. return on equity (ROE).
b. return on liabilities (ROL).
c. return on investment (ROI).
d. return on assets (ROA).

13. When only equity counts as capital, the leverage measure is
a. equal to the capital ratio.
b. equal to return on assets.
c. the inverse of return on assets.
d. assets divided by equity.

14. When only equity counts as capital, the higher the capital ratio, the
a. lower the leverage measure.
b. lower the degree of financial leverage.
c. higher the leverage measure.
d. A and B
e. B and C

15. Gross interest income is affected by
a. market interest rates.
b. the composition of assets held by banks.
c. interest expenses.
d. non-interest expenses.
e. A and B

16. If a bank increases its provisions for loan losses, its interest income is ____, and its noninterest income is ____.
a. reduced; not affected
b. reduced; reduced
c. not affected; reduced
d. not affected; not affected

17. Return on assets (ROA) will usually reveal when a bank’s performance is not up to par, but it does not indicate the reason for poor performance.
a. True
b. False

18. Gross interest expense is affected by
a. market interest rates.
b. the composition of assets held by the bank.
c. fee services provided by the bank.
d. A and B

19. If a bank had long-term fixed-rate assets and short-term liabilities, and interest rates increased over time, its net interest margin should
a. decrease.
b. increase.
c. stay the same.
d. either A or B, depending on whether the asset maturities exceed 10 years

21. Which of the following banks would likely have the highest return on equity?
a. high return on assets, high capital ratio
b. high return on assets, low capital ratio
c. low return on assets, low capital ratio
d. low return on assets, high capital ratio

22. Banks A and B have the same net income. Bank A has a higher capital ratio and more assets than B. Bank A’s return on assets is ____ than Bank B’s. Bank A’s return on equity is ____ than Bank B’s.
a. higher; higher
b. higher; lower
c. lower; higher
d. lower; lower

23. Banks G and H are the same size and have similar operations. Bank G holds the minimum level of capital and Bank H holds a higher level of capital. Bank G’s return on equity is probably ____ volatile than that of Bank H. Bank G’s beta is probably ____ than that of Bank H.
a. less; lower
b. less; higher
c. more; higher
d. more; lower

24. Bank K is conservatively managed. It benefits slightly when general economic conditions are very favorable and is hurt slightly when general economic conditions are very unfavorable. Its beta would likely be
a. less than zero.
b. zero.
c. between zero and 1.00.
d. greater than 1.00.

26. Bank X obtains most of its funds from NCDs, while Bank Y obtains much of its funds from passbook savings and from demand deposit accounts. Given this information, the net interest margin of Bank X would likely be ____ than that of Bank Y, and noninterest expenses would likely be ____ than that of Bank Y.
a. greater; greater
b. greater; less
c. less; less
d. less; greater

27. A bank’s ROE ____ account for its financial leverage. A bank’s ROA ____ account for its financial leverage.
a. does; does
b. does; does not
c. does not; does not
d. does not; does

28. A bank’s ROA ____ account for taxes on earnings. A bank’s ROE ____ account for taxes on earnings.
a. does; does
b. does; does not
c. does not; does not
d. does not; does

29. A bank’s ROA ____ account for loan losses. A bank’s ROE ____ account for loan losses.
a. does; does
b. does; does not
c. does not; does not
d. does not; does

31. Banks with relatively ____ ROAs often incur ____ noninterest expenses.
a. low; very low
b. low; very high
c. high; very high
d. none of the above

32. Bank T generally obtains a high percentage of its funds from wholesale CDs. Bank V which obtains most of its funds from retail CDs. Bank Z obtains its funds from checking accounts. The bank that will incur the highest interest expenses is ____.
a. Bank T
b. Bank V
c. Bank Z
d. all banks are the same

33. Which of the following is not a factor that affects cash flows of a commercial bank?
a. changes in economic growth
b. changes in the risk-free interest rate
c. changes in industry conditions
d. changes in management abilities
e. all of the above are factors that affect cash flows of a commercial bank

34. The value of a commercial bank can be modeled as the present value of its future cash flows.
a. True
b. False

35. The level of competition is an industry characteristic that will favorably affect cash flows, because a high level of competition may increase a bank’s volume of business or increase the prices it can charge for its services.
a. True
b. False

36. If the risk premium on a commercial bank rises, so will the required rate of return by investors who invest in the bank.
a. True
b. False

44. Changes in ____ are a factor affecting the value of a commercial bank over which the bank has some control.
a. economic growth
b. the risk-free interest rate
c. industry conditions
d. management abilities
e. none of the above

45. If a bank is too ____ in attempting to avoid loan losses, its net interest margin will be ____.
a. conservative; high
b. conservative; low
c. aggressive; high
d. aggressive; low
e. none of the above

47. When interest rates fall, the rates that a bank pays on deposits typically decline less than the interest rates that the bank earns on its loans and investments.
a. True
b. False

48. Small banks tend to make more loans to small local businesses, and the rates on these loans are typically lower than the rates that larger banks charge on the loans they provide to large businesses.
a. True
b. False

49. Which of the following factors affecting a bank’s gross interest income is not influenced by the bank’s policy decisions?
a. maturity and rate sensitivity of the bank’s assets
b. market interest rate movements
c. the bank’s loan rate
d. composition of the bank’s assets

50. A bank’s return on assets (ROA) could be lower than desired because of all of the following except:
a. the bank has experienced heavy loan losses.
b. the bank was locked into fixed-rate loans prior to a rise in market interest rates.
c. the bank is receiving a relatively small amount of noninterest income.
d. the bank has reduced its noninterest expenses.

3. Which of the following statements is incorrect?
a. A mutual-to-stock conversion allows savings institutions to obtain additional capital by issuing stock.
b. Because of the difference in owner control, mutual savings institutions are more susceptible to unfriendly takeovers.
c. When a mutual savings institution is involved in an acquisition, it first converts to a stock-owned savings institution.
d. Consolidation and acquisitions have caused the number of mutual and stock savings institutions to decline consistently over the years.

4. Savings institutions use most of their funds for ____. Commercial banks use most of their funds for ____.
a. mortgages; mortgages
b. mortgages; business loans and commercial real estate loans
c. business loans; commercial real estate loans and mortgages
d. commercial real estate loans and mortgages; business loans

7. When savings institutions are unable to attract sufficient deposits, they can
a. borrow in the federal funds market.
b. borrow from the Federal Reserve.
c. borrow through a repurchase agreement.
d. all of the above

9. If depositors move money from their checking account to short-term CDs, this would ____ the rate-sensitivity of the savings institution’s liabilities to interest rate movements.
a. increase
b. have no effect on
c. decrease
d. A or C, depending on the size of the savings institution

13. Which of the following is not an asset of savings institutions?
a. loans
b. mortgages
c. NOW accounts
d. mortgage-backed securities

14. Most mortgages originated by savings institutions are for
a. commercial buildings.
b. land for commercial purposes.
c. single-family homes or multifamily dwellings.
d. none of the above.

15. If a savings institutions’ assets have considerably longer duration than its liabilities, it can reduce its exposure to interest rate risk by
a. reducing its proportion of assets in the short duration categories.
b. increasing its proportion of liabilities in the short duration categories.
c. increasing its proportion of liabilities in the long duration category.
d. A and B

18. A contract that allows for the purchase of a specified debt security for a specified price at a future point in time is known as a(n)
a. interest rate futures contract.
b. interest rate swap contract.
c. interest cap contract.
d. security swap contract.

22. Which of the following was not a major reason for the savings institution crisis in the late 1980s?
a. a large proportion of loan losses on real estate loans
b. a large proportion of loan losses on loans by savings institutions to less-developed countries
c. fraud
d. illiquidity
e. increased interest expenses

24. The risk that a credit union will experience an unanticipated wave of withdrawals without an offsetting amount of new deposits is ____ risk.
a. credit (default)
b. interest rate
c. liquidity
d. exchange rate
e. none of the above

26. Savings institutions ____ allowed to borrow funds in the federal funds market; savings institutions ____ allowed to borrow funds from the Federal Reserve.
a. are; are
b. are; are not
c. are not; are not
d. are not; are

32. Which of the following is not an advantage of credit unions?
a. They can offer attractive rates to their member savers and borrowers because they are nonprofit and therefore are not taxed.
b. Their noninterest expenses are relatively low, because their labor, office, and furniture are often donated or provided at a very low cost through the affiliation of their members.
c. Their large membership allows them to effectively diversify geographically.
d. All of the above are advantages of credit unions.

34. The primary use of credit union funds is
a. loans to credit union members.
b. the purchase of government securities.
c. the purchase of agency securities.
d. the purchase of corporate bonds.
e. none of the above

40. The sensitivity of cost of funds to interest rate movements has been
a. greater for credit unions than savings institutions.
b. greater for credit unions than commercial banks.
c. lower for credit unions than for savings institutions or commercial banks.
d. similar for credit unions as savings institutions and commercial banks.

42. If credit union members have a particular affiliation with their employers and large layoffs occur, the credit union’s exposure to ____ risk may increase.
a. settlement
b. interest rate
c. credit
d. none of the above

44. Comparing credit unions with commercial banks and savings institutions
a. credit unions are less able to quickly generate additional deposits.
b. savings institutions and commercial banks can borrow from the Central Liquidity Facility, but credit unions cannot.
c. savings institutions and commercial banks are less able to quickly generate additional deposits.
d. credit unions have less exposure to liquidity risk.

45. The majority of maturities on consumer loans offered by credit unions are ____ term, causing income generated on their asset portfolio to be ____ to interest rate movements.
a. long; insensitive
b. short or medium; sensitive
c. long; sensitive
d. short or medium; insensitive

48. Credit unions differ from savings institutions in that they use a ____ proportion of their funds for mortgages and are ____ institutions.
a. smaller; non-profit
b. larger; non-profit
c. smaller; for-profit
d. larger; for-profit

49. Today, credit unions are regulated as to the
a. types of services they can offer.
b. rates they offer on deposits.
c. maturity of residential loans they make.
d. size of residential mortgage loans.

68. Which of the following is not an objective of a credit union?
a. to satisfy credit union members
b. to act as an intermediary for members by repackaging deposits
c. to provide loans to members who are in need of funds
d. all of the above are objectives of credit unions.

70. Which of the following is not a deposit source of funds for savings institutions?
a. passbook savings
b. retail CDs
c. money market deposit accounts
d. negotiable order of withdrawal (NOW) accounts
e. All of the above are deposit sources of funds for savings institutions.

71. ____ is not a main use of funds for savings institutions.
a. Capital
b. Mortgages
c. Consumer and commercial loans
d. Mortgage-backed securities

72. Savings institutions were adversely affected by the credit crisis because of their exposure to ____.
a. deposits
b. mortgages
c. commercial loans
d. loans from the Federal Reserve

74. Under the Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), all federally chartered savings institutions are to be regulated by the Federal Reserve, so these savings institutions no longer have an incentive to go regulator shopping.
a. True
b. False

75. During the credit crisis of 2008–2009, some credit unions suffered losses on second mortgages and home-equity loans that they had provided, and some credit unions experienced losses on mortgage-backed securities in which they had invested.
a. True
b. False

76. During the credit crisis of 2008–2009:
a. the Resolution Trust Corporation was formed to deal with insolvent savings institutions.
b. several large savings institutions failed, including Countrywide Financial and Washington Mutual.
c. savings institutions were insulated because their regulator subsidized any of them that experienced large loan defaults.
d. the main problem for savings institutions was exposure to interest rate risk.

77. During the credit crisis of 2008–2009, savings institutions experienced all of the following except:
a. high default rates on loans to finance leveraged buyouts.
b. a decline in the level of mortgage originations.
c. high default rates on subprime mortgages.
d. losses on investments in mortgage-backed securities.

78. The Financial Reform Act of 2010 did all of the following except:
a. strengthened the standards required to obtain a mortgage.
b. required more disclosures by financial institutions regarding the quality of the underlying assets when they sell mortgage-backed securities.
c. required savings institutions to sell off any holdings of junk bonds and prohibited them from investing in junk bonds in the future.
d. established the Consumer Financial Protection Bureau.